How important to the value proposition for an outsourcing initiative is the service provider's domain knowledge specific to the buyer's industry? Many buyers report that the provider's expertise in a particular business process ranks higher in importance than industry expertise when selecting a service provider.
But there are situations where industry knowledge is crucial, especially in industries undergoing significant regulatory or other changes and in situations where innovation is a key deliverable in the outsourcing arrangement. In addition, outsourcing solutions are beginning to trend toward verticalization.
Outsourcing Center's annual Outsourcing Excellence Awards data gathered during 2009 shows a significant number of buyers that are reaping benefits from selecting a service provider that lacked the necessary level of expertise in the buyer's industry - and two that even lacked expertise in the business process that was outsourced. The study looked at 63 outsourcing relationships where the parties had moved beyond the transition phase. In twenty-four percent of these deals, the buyers are devoting a significant amount of time and effort (and sometimes capital) to assist their providers in gaining the necessary level of domain knowledge in the buyer's industry.
It's fairly obvious how the providers benefit from such valuable assistance, as the increased knowledge and insights helps them build their business in that industry. But what are the benefits to the buyers using this strategy? And what is the extent of the buyers' assistance in beefing up providers' knowledge?
Increasingly, collaboration is a hallmark of successful outsourcing relationships as it enables partnering in dealing with business challenges and opportunities. All of the buyers (in the twenty-four percent) in Outsourcing Center's study report said that a collaborative approach was a key criterion when selecting their provider.
All of the buyers in the studied group were in a growth mode when they outsourced, and at the top of their selection criteria in nearly every case was finding a provider that would "grow with" the buyer's business. Interestingly, none of the providers were new players; all were long established, highly successful outsourcers, and several were tier-one players.
Twenty-six percent of the providers were located in India; the others were headquartered in the United States (some with offshore components). The buyers in the studied group range in size from small or midsized businesses to large enterprises and are in eight different industries. Half of the deals Outsourcing Center studied were ITO; half were BPO.
Buyers explained that choosing a provider that would "grow with" them meant that the provider wanted to grow its capabilities. Thus, as the buyer's business grew, the provider would be more amenable to investments and scaling resources, which in turn would bring a new revenue stream from the gained industry expertise.
Buyers' roles in assisting providers with vertical domain knowledge
The buyers in the studied group report four types of assistance they provide to their outsourcing partners regarding industry knowledge:
- Acting as a sounding board for new ideas the provider is considering regarding a potential solution
- Serving as the testing ground for a provider's new technology
- Participating with the provider in joint development of a technology solution or in designing a process model
- Advising where the provider has crucial knowledge gaps, alerting the provider to changing industry regulations or other industry/market developments
As Figure 1 illustrates, one of the biggest benefits buyers gain from this strategy is a significant first-mover advantage (and often customization) for new technology solutions. Combining the chart's pie slices for serving as a technology testing ground or joint activities in developing new technology, Figure 1 shows that nearly half (47%) of the buyers gained this first-mover advantage.
Good targets for the strategy
What type of organization is a good candidate for the strategy of selecting a provider that wants to increase its industry knowledge with the buyer's help? The study revealed three characteristics that drive this strategy:
- A buyer in an industry with significant regulatory change. The healthcare and financial services industries are good examples and also comprised one-third of the buyers studied.
- A buyer in an industry with a quickly changing market competition factors. Telecommunications, media/entertainment, and energy/utilities represented the studied buyers' industries regarding this driver.
- A multinational buyer that decides to outsource in a region with specific requirements that are different from other regions. The study included two buyers in this category. Both had existing relationships with their providers for scope in the United States and wanted to add scope in European countries where the providers lacked knowledge of regional impacts on the process outsourced.
Two important factors for success
The study also found that a high degree of trust is a key characteristic of these relationships, and the parties must build that trust and partnering mode during the planning stages of their relationship. They often "experiment" and conduct pilots regarding phases of the technology and process solutions they develop together, and sometimes they undertake these activities without service level agreements (SLAs) in place at the outset of a particular initiative.
Buyers participating in the study also reported that cultural fit is a crucial key to their success. Companies that don't share the same approach to decision making about investing in opportunities, don't have the same risk appetite, and don't have the same decision process (hierarchal or entrepreneurial) will encounter problems in trying to jointly develop new industry solutions.
While this strategy was very successful for the companies participating in this study and for many that are outsourcing a process that is nascent in outsourcing, it is not universally a good idea. In cases, for instance, where the buyer needs quick, proven solutions at the outset in order to achieve its objectives, it would find more value in selecting a service provider with already-established domain knowledge in the buyer's industry and business process.
Lessons from the Outsourcing Journal:
- Some buyers reap benefits from selecting an outsourcing service provider that lacks the necessary level of knowledge in the buyer's industry and assisting the provider in gaining the necessary industry expertise. The buyer can benefit from gaining a first-mover advantage in new solutions. In addition, the provider may be more willing to invest in the buyer's business since the industry knowledge shared by the buyer will help the provider gain a new revenue stream.
- A high degree of trust, willingness to take a collaborative partnering approach, and a strong cultural fit are crucial to the success of an outsourcing arrangement where the buyer helps the provider gain industry knowledge that will help both companies' businesses grow.